BigTrends

We noted that it was a very unusual event when the VIX popped 30% higher in 1 day on April 27th (from 17 to 22).  That event certainly marked a new uptrend in the measure of option volatility.  Since then, we've seen the VIX reach as high as 47 intraday -- recently pullbacks have been contained around the 30 level.  Our analysis indicates that this higher VIX is likely to remain in place for some time.  Additionally, we haven't seen a large corresponding lasting pop in the Put/Call Ratios -- which indicates that there is not an overblown Put buying panic which might precede a big market bottom (and rapid decline in the VIX).

The first chart below shows the width of the normal Bollinger Bands.  You can see that the recent VIX volatility expansion has actually caused a larger increase in the width of the Bands than occurred in 2008.  The second chart shows 80 Day Bollinger Bands (blue) and BigTrends Acceleration Bands (yellow).  Note the closes above the Top Acceleration Band, and also the sustained moves above the Top Bollinger Band.  Volatility, in terms of option premium pricing, looks likely to remain extended for some time based on our current analysis.

VIX Daily Chart with Bollinger Band Width


VIX Daily Chart with 80 Day Bollinger Bands and 20 Day Acceleration Bands

Do you ever miss a trade, and then mentally beat yourself up for not jumping in when you saw an obvious pattern emerging? Sure, we all do. In fact, I was doing that on Zion Bank (ticker: ZION) from its beautiful pattern on the Acceleration Bands breakout in January, complemented perfectly by both the Percent R and the Efficiency Ratio - see the left side of the chart below:

ZION Daily Chart with Acceleration Bands, Percent R & Efficiency Ratio



So when I saw this same pattern emerging with the 2 days in a row above the upper Acceleration Band on March 11, I was stalking this trade for a low-risk entry point. I saw Percent R give me the ideal "retest" point the morning of March 15, as the stock pulled back briefly intraday under the 21 support area. I pounced, buying the April 18 call at 3.20.  Within 2 days the stock snapped up from 20.75 to over 23, and on that 10% gain in the stock so quickly, I told my Options Shark subscribers to lock down their profits at 4.90 for a 53% gain on St. Patrick's Day March 17 - a nice green day for subscribers for sure!

By the way, this entry on March 15 qualified as a "bend but don't break" retest, a pattern I highlight in my Percent R DVD course. The basic theme is that the markets are constantly testing the strength of a trend, and the battle between the bulls & bears is very telling as to this key question: who is in control? When you use simple indicators like Acceleration bands, Percent R and the Efficiency Ratio to tell you who's winning the war, then all that needs to be done from there is to find a low-risk entry point, where you can stop out your trade quickly if it's not working while being able to let the trend ride to more dramatic gains in comparison to the small risk taken.

It sure has been a nice ride in 2009 and the start of 2010, but as the jobs number for December just came in at a negative surprise of -85,000 jobs lost last month, when many were expecting a gain, tells us the market may react negatively. Sure, you could say that means the Fed stays looser longer, but they can't get much looser than they already are. (BTW, Ben Bernanke as Time's Person of the Year tells me that yes, he stopped 2009 from being the next great depression, but by creating every form of stimulus known to man, in my book this tells us the next great surprise is MONSTER inflation in a few years).

Check out these chart of CBOE Volatility Index (VIX) vs. S&P 500 Trust (SPY) below. You can see from the BigTrends Charts (see Tools & Resources page to create these yourself), with a 20-day Acceleration Band in red and the 20-day Bollinger Band in green, we're scraping near the low end of the range for the VIX, showing much complacency. The last several times this happened, the market was headed for a correction in the coming weeks.



Not coincidentally, the SPY is right at the upper end of its range. Yes, it's hit new highs, but this is an uptrending channel here, and we're at the upper end of the channel. So be careful out there, trail your stops tightly, and prepare for some selling to come to spark renewed fear which should create the next great buying opportunity in 2-3 weeks. Looking at the bands, look for VIX to pop up near 24 at least, and the SPY to dip back down to the 110 area before we get the fear spike needed to mark a short-term bottom.

The CBOE Volatility Index (VIX) has been in a range between 20 and 30 since July of this year.  It keeps coming back to the mid-level of 25, however.  Just this week, we broke above 25 to test the Top Acceleration and Bollinger Bands (see the following chart).  Previous tests of this area were quickly reversed lower, in line with a market rally.

However, based on Friday's intra-day activity thus far, it looks as if we are having another run up in the VIX to its Bands.  This may correlate with a bit longer period of market weakness than many are anticipating.  This is the last trading day of October and looks to be a selling day.  Will the first trading day of November come Monday bring more selling?

Here are a few good charts to help conceptualize last week's record breaking rally in Gold.  In my view, each chart supports further upside this week with a probable short-term high developing later in the week. 

Of course it's hard to mention Gold without mentioning Goldman Sachs (GS), the new market bell-weather, which has earnings Thursday before the bell.  It will be interesting to see if Gold can continue its rally amid a larger financial rally or vice-a-versa (last week GLD gained 4.5% and XLF gained 6.65% an uncharacteristic correlation).

My favorite pics below are the CBOE Gold Volatility Index and the GLD Weekly with Acceleration Bands Signals.  The 'Gold Vix' as it's called gives unique insight on Gold prices and similar the the traditional VIX can provide guidance on short-term reversal areas.  In the chart below I'm looking for relative extremes in Gold Volatility on Bollinger Bands. 

Finally, the GLD weekly chart is nothing short of awesome.  With all time highs being made each day it would seem a reversal is near, however, if we close outside the upper Acceleration Bands this week, look out for an even larger weekly rally.  Note the past signals and average length of holding.  

Gold:Sliver Rally (GLD:SLV) with Bollingers






Top 20 Option Trade from Breakout Day (10/6) - LiveVolPro.com


Gold (GLD) versus US Dollar (UUP)


GLD Weekly with Acceleration Band System


Gold Volatility Index (Gold Vix)with Bollingers

Today the CBOE Volatility Index (VIX) closed over the 28 level, up over 15% on the day.

The VIX came very close to hitting its Top Acceleration Band on the Daily Chart.  The Top Band was at 28.51 today, and the intra-day high on the VIX was 28.39. 

If you examine the following chart, you can see that this is the first time the VIX has come this close to its Top Band since January of this year.  This occurs as we approach September and October, traditionally the worst months for the markets in terms of performance.

So is the VIX ready to break its Bands and rocket higher?  Not necessarily, although the trend looks likely to go higher.  One item to note is that the Bands are much narrower than they have been in some time, so reaching the Top Band is easier.  Additionally, the overall environment is less volatile than it was recently and there is overhead resistance.  So, upside on the VIX is likely to be capped in the 30 to 33 area.

VIX Daily Chart

 

Just a quick follow-up from my previous post on the S&P500 Long Signal from 7/21/2009 - if you need a quick refresher on Acceleration Bands and how they generate long/short signals it's worth the time.

All too often traders focus on how and why to enter a trade while forgetting about managing the trade and the process of exiting.  In realty the life of a trade is broken down into three equal parts - Entry Parameters, Open Trade Management, and Exits rules.  For the Acceleration Band LONG signal we are currently managing the position.   My previous post focuses on the entry parameters and I'll discuss exiting this type of signal in the near future.

In every trade you should have defined key levels that help you navigate the charts while avoiding emotion.  For example, traders can use simple methods like moving averages to define key levels.  For options traders I recommend using a 10 bar exponential moving average and based on your time frame use values at the close of your bar.  As of now, the SPY has a key level at $99.64 on the daily chart - this means we need to hold this level at the close or the Acceleration Bands will signal an exit.  Check out the visual candy below:

After the SP500 Index gained nearly 7% last week most traders were looking for some profit taking on the horizon, however, as of Tuesday sellers continue avoid this market.  Even with continued strength, there are bearish signals, most notable in Friday's CBOE Equity Put/Call Ratio and Wednesday's VIX Confusion, just to mention a couple.  That said, we are seeing a number of technical/momentum based indicators signaling long opportunities starting last Monday, but today's price action raises the bar...

Tuesday's close marks the second consecutive day the SP500 closed at 2009 highs-in my view; this not only re-confirms last week's breakout but significantly minimizes chances of another major downturn to March levels.  In addition, if we close 5% above the 200 day EMA (currently 1.9% above) I would rule out a retest of March 9^th lows all together.

Perhaps one of the most difficult momentum indicators to trigger a buy or sell for the SP500 is Acceleration Bands - the bands target the top 5% of bull and bear trends helping traders focus on the strongest moves.  Check out our free Indicator How To Video on Acceleration Bands.  The signals are easy - a traditional Acceleration Band Buy Signal occurs after 2 consecutive closes outside the upper band while a Sell Signal occurs after 2 consecutive closes below the lower bands...

Why is this Important NOW?

Tuesday's close marks the second consecutive close above the upper Acceleration Band meaning a Bullish Acceleration is expected in the market - this has not occurred since 9/19/07 (chart below).  The previous two signals were each SELL SHORT signals on the market on 10/07/08 and 02/27/09 (chart below).  Overall the previous five Acceleration Band signals closed profitable on the SP500.

SP500 Index - Daily - Acceleration Bands

Lots of questions on Acceleration Bands, as one of my favorite indicators to spot the truly biggest trends. Here's more details on how the indicator works.

A common mistake that beginning traders make is assuming a stock has moved too far, and if they don't make the additional error of betting against the trend, they at least continue to miss out by leaving too much money and opportunity on the table.

In addition to the chart I shared with you last week on American Express (AXP) which went on to even higher heights thanks to big earnings and the current prop-up in the financials, one stock my scans picked up early last week was jeans and apparel maker Phillips-Van Heusen (PVH).  Usually you'd think that anything having to do with retail in a rough economy would be the LAST place you'd want to look, but the scans said here's a leading stock with more potential.

In my Options Shark service, we managed to enter the May 25 calls a week ago at 2.75 when the stock was trading around 26.50, as the indicators said all systems were GO for more upside. Per my rules on taking half at a +100% gain, we sold half of the position at 5.50 last Thursday morning, leaving us with another "Free Trade" from here.

Phillips-Van Heusen (PVH) Daily Chart with 20-day Acceleration Bands & Bollinger Bands, plus Percent R and Efficiency Ratio

It's so much easier not to second-guess yourself once you're in a free trade position. You can simply let the rules of your system or method either carry the trend further, or lock in the remainder if the trailing stop gets hit.